Business Paradigms, Inc.

Bank Account Reconciliation - How to Do One

By: R. Scott White

Few things are more frustrating than a bank rec that just doesn't balance. If you carefully follow the instructions below, you should be able to reconcile your bank account the first time, every time.

You'll find these instructions more useful if you refer to our linked Example.

Getting Started

1. To start your bank reconciliation, you'll need the following:

2. Confirm that the beginning account balance from this month's bank statement agrees with the ending balance from last month's bank statement. Sometimes, banks post back-dated transactions to accounts after they've mailed your statement.

3. Confirm that the beginning cash account balance from this month's general ledger agrees with the ending cash balance from last month's bank reconciliation. If a back-dated entry was posted to the cash account after doing last month's reconciliation, this step will point that out.

4. Look at the "Deposits in Transit" section of last month's bank reconciliation. At the end of each month, any deposit that was recorded in the books but did not appear as a credit on that month's bank statement is a deposit in transit. Now, look at this month's bank statement. Each of last month's deposits in transit should appear in the credit column of the bank statement.

5. When you find a credit on this month's bank statement that matches a deposit in transit, write the letter "d" to the right of the deposit on last month's bank rec. The "d" tells you that the deposit cleared the bank in the following month.

6. On this month's bank statement, write a horizontal line (--) to the right of the matching deposit amount. That tells you that you traced that deposit back to last month's bank rec.

7. Here's the secret to doing painless bank recs: Be meticulous about writing your clearing markers in both places. In other words, when you write the "d" on last month's bank rec, be absolutely sure to draw the horizontal line next to its matching credit on the bank statement. If you do one without the other, you'll cause yourself interminable grief when you try to reconcile.

8. The remaining credits on the bank statement (those without the horizontal line) represent deposits that should be recorded in this month's general ledger. Trace each bank statement credit back to the general ledger deposits for this month. Draw your horizontal line to the right of each bank credit, and again be sure to put your "d" to the right of its matching general ledger entry.

9. Now, examine the bank statement. If you find any bank credits that don't have a horizontal line, you know that they have not been recorded in the general ledger. So, record those transactions before going any further.

10. The next step is to identify which cheques have cleared the bank. If you use pre-printed cheques, the cheque number is magnetically imprinted on the bottom. The bank has cheque readers that will automatically print the cheque number on your bank statement. You can refer to the cheque number on your bank statement to quickly locate it on last month's bank rec or in your general ledger. If the cheque numbers don't appear on your bank statement, you should sort your cheques in ascending numerical order. See this linked article for a tip on how to sort them faster.

11. First, look at the "Outstanding Cheques" section of last month's bank rec. Look for each of those cheques on the bank statement. When you find a match, write a "c" to the right of the cheque amount on the bank rec, and draw a horizontal line to the right of the amount on the bank statement.

12. If your bank statement doesn't show cheque numbers, you should use the cheques enclosed in the bank statement to do the matching.

Look at the first cheque. The lower right-hand corner of the cheque has a magnetic imprint of the dollar value of the cheque. That is the amount that will appear on your bank statement. Compare that magnetic imprint to the dollar amount you recorded on the cheque. They should be the same. If they aren't, the bank has made a mistake. If the mistake is significant, you'll want to call the bank and ask them to fix it.

The back of each cheque is stamped with the date that it cleared the bank. Look at the bank statement for that date and put your horizontal line next to the amount in the debit column. Then, find your general ledger entry for that cheque number and write a "c" beside it.

If the cheque was written in a month prior to the month your reconciling, you should find it in the "Outstanding Cheques" section of last month's bank rec. Otherwise, look for it in this month's general ledger.

13. When you've finished clearing off all the cheques, look for any debit entry on the bank statement that doesn't have a horizontal line. These are usually automatic withdrawals from the account for items such as car leases, line of credit payments and bank service charges. Look at last month's bank rec and this month's general ledger to see if you can find a match. If not, record the transaction in your general ledger before continuing your bank rec.

14. At this point, every debit and credit entry on your bank statement should have a horizontal line to the right of the dollar amount.

15. What about voided cheques? During the month you should keep all voided cheques in the folder where you keep your bank recs. If any of last month's outstanding cheques were voided this month, write a "v" to the right of them on the bank rec. If a cheque was voided this month, find it's original entry in the general ledger and write a "v" next to it. Then find the debit entry where it was voided and put a "v" there too.

Now You're Ready to Do the Bank Reconciliation

1. Refer to our example for the format.

2. At the top, enter the ending bank statement balance.

3. Now, review last month's bank rec for any deposits in transit that don't have a "d" written beside them. They still haven't cleared the bank, and you need to list them again as deposits in transit on this month's bank rec. You also need to investigate why they haven't made it to the bank. They could be erroneous entries that need to be reversed from your books.

3. Next go through the deposits listed in this month's general ledger. Any deposit without a "d" gets listed as a deposit in transit.

4. Add up this month's deposits in transit and enter the total to the right of the last deposit in transit listed (in the same column as the ending bank statement balance).

5. Add the total deposits in transit to the ending bank statement balance and enter the total on the next line, as shown in our example.

6. Moving on to the cheques, list any outstanding cheques from last month's bank rec that don't have a "c" or a "v" beside them. They still haven't cleared the bank and they haven't been voided.

It's important to note that banks won't cash cheques that are over six months old (stale cheques). If you have any outstanding cheques older than six months, void them before finishing this month's reconciliation. Leaving unvoided, stale cheques on your books distorts your financial statements. You'll show less cash than you actually have, and you'll either understate a liability or you'll understate your profit.

7. Total the outstanding cheques on your bank rec and write that number to the right of the last listed cheque.

8. Your ending general ledger balance should equal the ending cash balance from this month's bank statement plus the deposits in transit minus your outstanding cheques. The bank gives us a final cash balance on the bank statement. It says, "here's the ending balance after all the transactions we know about have cleared the bank". If they had known about the other deposits and the other cheques we've recorded, they would have included those transactions on the statement, and they would show the same ending cash balance we show in our general ledger.

9. The bottom section of the bank reconciliation is your proof that it works. Before you fill in this section, you need to re-print your cash account general ledger activity for this month. Remember that you made additional entries to the books for transactions that appeared on the bank statements but not on the books. The general ledger balance has changed from the balance that shows on the copy where you wrote all your d's, c's and v's.

9. Write down the ending cash balance from last month's bank reconciliation. Compare that balance to the opening general ledger balance for this month. If they're different, someone recorded another entry last month after the reconciliation was done.

10. On the next line, write the total of all the deposits (debits) recorded in this month's general ledger.

11. The next line shows the total of all the cheques (credits) recorded in this month's general ledger.

12. Add the beginning general ledger balance to the total deposits and subtract the cheques. You should end up with the same number as the one from number 8 above. Congratulations! You've reconciled.

13. If you didn't reconcile, see this linked article for tips to help you solve the problem.

Not Quite Finished

1. Your newly printed general ledger doesn't show all those nice little clearing marks you, so carefully, wrote on your working copy. To make a nice, neat job of it, you should copy all the clearing marks onto the new general ledger and staple it to the back of this month's bank rec as supporting documentation for your bank rec. It takes a few minutes, but it can be quite helpful to your auditors and anyone else who needs to examine the bank rec at a later date.

2. Don't separate the cancelled cheques from the bank statement. Simply wrap them back up in the statement. Write the statement date on the outside of the envelope. If you have more than one cash account, write the name of the account on the envelope too. Then you can just store them in a box or filing cabinet drawer until someone decides to send them to storage.